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15 costly mistakes startups make

Bonus Mistake: No Company Culture

If somebody had asked my dad what his company culture was, he would have locked them with a 1,000-foot John Wayne stare. That would sound like a bunch of woo-woo-woo hippie stuff to him, one of the last stoic sons of the West. But in truth, the family excavating business did have a culture. It was written on the back of his business card: "The bitterness of poor quality and workmanship remains long after the sweetness of the low bid is forgotten."In that phrase he told all potential clients that he and my brother and mother hustled. That they were fair and committed. That they believed in quality. Still, he would have thought that's just how you run a business, not some fancy business school lingo about culture. I might have agreed with him until I sat this week with Ross Sanders, the executive director of Bizdom, the startup accelerator founded by Dan Gilbert. Read the whole story here.

There's nothing as American as starting up a business, becoming your own boss, taking your idea and seeing it on shelves or in other products. Entrepreneurship is in our DNA. And in Detroit even more so: It's our history, and it's also our future.

The New Economy Initiative just landed another $33 million from some of the nation's biggest foundations to spend on entrepreneurship and innovation. Bizdom Detroit has incubated nearly two dozen portfolio companies. Eleven companies have popped up after getting a boost from the Hatch Detroit business competition. D:hive has helped more than 200 entrepreneurs get their start. Add in all the business consultants and chambers of commerce and lawyers and accountants, and this town is flush with startup help.

But the statistics of business failure are still staggering. New firms with employees only have a 50 percent shot at making it past year five, according to a Dun & Bradstreet Credibility Corp. report based on U.S. Census data. Other research makes it seem worse, some slightly better, but it all tells the same story: It's tough out there for an entrepreneur.

So Crain's talked with area business owners and business-development agencies about the mistakes startup entrepreneurs make. We asked them to identify key lessons startups could learn to ensure they are more than just statistics. Here's our panel:

Mistake No. 1: Unfocused dreaming

That dream you have of starting a shoe store/bookstore/bar/bakery? Yeah, it makes April Boyle cringe just a little bit. As the director of small-business initiatives at D:hive, she would like you to focus.

"We have people come in and say I want to open … and they have, like, nine different business models," said Boyle. "I had a guy who does bike shop/brunch/gallery/urban farm/event space. And it was like, holy crap. You have to simplify and start with one thing. Do a really great job with that one thing and then build on it."

Through D:hive's Build program, Boyle has advised more than 200 budding entrepreneurs, many of whom needed help narrowing down their ideas. The program's curriculum actually forces that at about week four of a 12-week program by making small-business owners think unit sales, break-even points and typical transaction size.

Once they realize that, for example, a typical customer is going to be an $18 sale, they can extrapolate how many times they need to sell that unit to break even. And that, she said, starts getting everyone focused.

"We tell them they can't leave the room until they define their unit of sale," she said, laughing. "So when they have these nine things, they start realizing maybe their dream is too big."

Mistake No. 2: Chase funding before clients

"People hear these rumors that the streets of Detroit are lined with golden coins for entrepreneurs, that we have a lot of grants here," said Matt Clayson, who works with creative industry startups, such as filmmakers and designers, at the Detroit Creative Corridor Center. "There are supportive services here, there are business advantages of coming here, but it's not because we're throwing money out of the car."

But entrepreneurs still arrive on the shores of Detroit thinking that they can get free and easy money to launch their dreams. And Clayson routinely gives them this advice: "Don't go out of the gate asking for funding. Go out of the gate asking for clients."

Why? Because the best source of revenue is from sales, not from grants or loans. Planning for the first client and the second client and third client, and focusing on how you are going to find them, builds a sustainable business rather than one that is teetering on debt.

For Liz Blondy, that meant spending the bulk of her day thinking about how she would entice customers to her doggie day care, Canine to Five. And for a neighborhood business like hers, she found that other local businesses were a great source of referrals.

"Really engage with your neighborhood," she said. "Take two hours to introduce yourself to your 30 closest businesses and then continue to build those relationships so you can do business together."

Mistake No. 3: Borrow too much, too early

"Money is very important, but having it at the right stage of your business is more important," said Jess Daniel, co-founder of FoodLab Detroit, which develops food entrepreneurs. "But often, it's less hard to figure out where you get the money from than how you will pay it off."

Ouch.

To help guide her small businesses, she starts with a deceptively simple question: What would you use it for? Then she has them break it down line by line to see where the money would go. That way, the owners are thoughtful of how much they really need and don't take out more than they can repay.

"You'd be surprised," she said, "how many people can't answer that question, but yet they are coming and saying they need to do a Kickstarter or apply for a loan."

Daniel knows from experience how hard it can be, struggling to start with little capital but also not wanting to take on debt she couldn't repay. She had her own popup restaurant, Neighborhood Noodle, and she needed a weekly reserve of $2,000 to stock inventory and buy food.

Sometimes you need that Kickstarter campaign or microloan to get going — not everyone has access to family and friends' money — but, she warns, keep expenses under control, understand where every dime of the loan will go and how you will make money to repay it.

Mistake No. 4: Hoard equity ownership

The cash-seeking mistake isn't unique to small businesses or neighborhood retail. Most of the entrepreneurs accelerating at TechTown Detroit are developing high-tech startups that will need significant equity investments to get their innovations to market. Still, Leslie Lynn Smith still tells them to focus on customers not cash.

"The first and last thing that every entrepreneur asks us about is capital," she said. "Get me money, get me money, get me money. But we tell them revenue is the best kind of money, so let's figure out how to get customers first."

But she also has to prepare them for the day when they will be ready for investment. And as much as those entrepreneurs want money, they don't like the idea of giving up any ownership.

"We have to talk about getting other people's money and what that actually costs you," said Smith. "Once they get comfortable with that, they don't want it to be a whole lot of anything. But my advice is … all of nothing is still nothing. Continuing to own the whole doesn't increase its value."

Alan Whitman empathizes with Smith. He constantly tries to explain the same thing to his clients who come to him at Baker Tilly for help with accounting and business development.

"One hundred percent of something may not be as great as some lesser percentage of a piece of your business," he said. "That's a hard thing to drill into entrepreneurs' heads."

Mistake No. 5: Start up with credit cards but no financial plan

For businesses that are building a product or are capital intensive, the worst thing an entrepreneur can be is undercapitalized. That doesn't mean your credit cards are fair game.

"We are all excited, we have a couple of credit cards that are not filled, we haven't really talked with our family, but I'm so excited about this idea that I'm just going to use these credit cards to rent space, hire a few people, make a few trips," said Robert Holland, CEO and chairman of Vistage Michigan. "Pretty soon you've maxed out two of them, but they keep sending them to me in the mail, so I'll start a third or a fourth."

Instead, he recommends working up an Excel pro forma about how long it will take to develop the product idea. Once you have that time frame, put together a skeleton business plan that shows how much you need to cover expenses for that long, including paying yourself, others, space rental, prototyping, etc. Now, he said, you know exactly what it will take to get the business off the ground and for how long you need to plan for losses.

"A lot of folks are engineers, software developers; they never learn how to put together a capitalization plan, so they are just winging it and get into trouble and there is no way to continue," Holland said.

But with even a basic spreadsheet of costs, you can tell if it's smart to start on a credit card (rarely, but not never) or if you can take a viable financial plan to friends, family or the bank.

Mistake No. 6: Start undercapitalized

Of course, just because you shouldn't chase cash before clients doesn't mean you can start out with nothing. How much you need depends on what kind of business you're starting. Daniel may have only needed $2,000 for her noodle shop, but a high-tech innovator is going to need significantly more cash.

Whatever type of business you are opening, don't let excitement and passion keep you from good financial planning. You don't want to be another small-business carcass on the startup highway.

Ken Dalto

To avoid that, corporate turnaround expert Ken Dalto advises clients to have 120-150 days worth of money in the bank to cover all of their expenses, all of their inventory, all the things they need to create sales.

"Assume not one dollar will come in during that period," he said.

Plus, he advises having another 60 days worth of cash on hand to cover receivables. Why 60 days? Because that's how long it takes most clients to pay these days, so you need to be able to survive while the check is in the mail.

"If you don't capitalize correctly from the start, you have to go back to square one and get capitalized correctly, through investors, parents, banks, whatever," he said. "But you have to restructure before you recapitalize. You can't just recapitalize because you'll just find yourself in the same hole."

Mistake No. 7: Fail to understand the financials

Mike Cope sees a lot of small businesses come through the doors of Comerica Bank, where he is the senior vice president for small-business banking in Michigan. He primarily advises second-stage companies, but there is, he said, a near-universal mistake among small businesses: not understanding the financials.

"Really understand them," he said. "Don't do a financial statement just because a banker asked for it. Play with your financials. Run scenarios. For example, ask, 'If I'm really, really successful, and this happens, the impact on my cash would be what?' "

That doesn't mean every entrepreneur needs to be an accounting expert. In fact, Cope highly recommends that every business owner surround themselves with a strong team of lawyers, accountants and the like. But, he said, every CEO should be able to understand the basics, like unit sales.

"When it's a fresh startup, I think oftentimes either the owner is not being realistic or doesn't have enough information to nail the unit sales," he said. "But this is how you can decide if you can make a go of it."

Mistake No. 8: Fail to plan

"The strength and weakness of the entrepreneur is that they have this great idea that they are passionate about or they think they will make a whole lot of money on," he said. "But they get so focused on it that they lose sight on a lot of things. They don't do their homework; they don't understand competitors."

He recently worked with a pair of engineering students, one a Ph.D. and one a master's student, who bullheadedly focused on building a prototype while ignoring the business side of launching: competitive analysis, marketing, financial planning, etc.

"They just focused on making the product," he said. "They spent time and money and then found out someone else had made it faster and cheaper than they did."

By comparison, he is seeing Wayne State student Elias Majid turn his tea company, Eli Tea LLC, into a successful venture. Majid's teas are now found in several local restaurants, and he's working to grow his wholesale distribution.

"He is a force of nature," said Agee. "His product is good, of course, but he is constantly learning. He steps back and does the 10,000-foot view. He's engrossed in his product and making it profitable."

Mistake No. 9: Don't plan for growth

For the first few years, that was good enough. But by 2012, she had bought two adjacent parcels of land from the city, trying to accommodate outdoor play space for the dogs and employee parking. There wasn't enough room for both.

So by 2013, she had expanded into Ferndale, hoping that would alleviate the pressure. She also raised her prices, from $25 a day to $27 a day — to control growth.

"I thought that would help, that we'd no longer be faced with not having enough space," she said.

Nope.

"I have the exact same problem of where to grow and how to grow. Wow, I didn't learn from that mistake."

So, now, she is committed to solving the problem. She is writing a vision plan and thinking about what she wants Canine to Five to look like in five to 10 years.

"I've realized," she said, "that I could have spent more money on the front end to pick a location that could accommodate what I wanted to look like in five to 10 years, if I'd stopped and known what I wanted to look like in five to 10 years."

Not every startup's growth issues are focused on physical space, but all of them should know what they want to be when they grow up, so to speak.

Without a vision plan or some guidelines, you won't know if you're making smart decisions to get you where you want to be.

Mistake No. 10: Grow too fast

In the startup stage, it's all about the hustle. You don't want to say no to anything because, well, who knows when another client or sale will land. But eventually, you find yourself overextended and underdelivering. And that's something no business owner ever wanted.

"You find yourself going for the easy sales just to cover costs because you're often undercapitalized and have grown too fast," said Dalto. "You have to ask yourself, 'What business are you in?' Are you focusing on the real business you want to build, or are you doing three or four different things because you need sales?"

"We hoped that by increasing the number of stores and keeping up regular three-times-a-week deliveries, we would achieve a level of ubiquity, and the losses would start turning into profits," said CEO and co-owner Noam Kimelman in an email. "Instead, we just lost a whole bunch of money."

Now Kimelman is working to slow growth and restructure how the company operates. That's exactly what Dalto would recommend to his clients.

"When you get in this situation, you have to go through some kind of restructuring," he said. "You have to cut overhead, not grow as quick, put in financial controls, get monthly financial statements. My rule of thumb is throttle the sales down by 20 to 25 percent."

Fresh Corner Café is starting by focusing only on well-lit and clean corner stores with high traffic. They are working more closely with store owners, and are staggering their growth in low-income neighborhoods with larger, more profitable accounts in other areas.

We were "trying to force fresh food into stores that will never be able to sell fresh food," Kimelman said. "We were possibly too idealistic in the types of corner stores we could affect. We (now) require a significant level of storeowner buy-in by removing the guarantee on products. We used to refund any products that didn't sell before expiration."

The retrenching also spawned a nonprofit, Detroit Food Academy, to lead food education and nutrition initiatives by teaching high school students to build triple bottom line food businesses.

Mistake No. 11: Don't ask for help

To grow successfully, entrepreneurs must ask for help. They need good accountants, lawyers, bankers, advisers. They can't be both the vision and the expert on how to structure the company and set up financial controls. There must be a team of support.

"You come with a skill — you are a really good tool maker or a doctor or fill in the blank and you like it — but now when you run the business, it's a bit of a game changer. There are 140 things coming at you," said Cope. "You can't become an expert at everything before you get into the business, but you can surround yourself with good advisers."

Whitman couldn't agree more. For about 18 months, he watched one of his clients grow too quickly. But the entrepreneur didn't want to ask for help or take advice, he said.

When the company finally hit $3 million in sales, the owner came to Whitman for help. He realized quality was sliding and he could lose his largest customer.

"A lot of entrepreneurs are too tied up in the product they have developed or solution they have developed and don't spend time paying attention on how to go to market, how to turn that product into a sustainable business," Whitman said. "They are worried too much about the immediate versus focusing on the important. … They also aren't willing to accept help. It's a control-alt-delete in your brain. Reboot your brain to recognize to be willing to accept help."

Whitman helped his client restructure his financials, creating a three-month projected financial plan so he could understand what was happening in the near term. He also created a "within/without" plan to model what would happen if the company suddenly lost its largest customer.

The informal network is just as critical as the full advisers. Having other business owners to chat with and use as a sounding board is imperative. Look for a mentor in your field or another owner you admire and approach them about guiding you and your growth. If you present yourself as sincere and committed to growing your business and creating jobs the community, they will take you seriously.

"I was surprised how very infrequently these small businesses have anyone that they can go to ask questions," said Smith, whose program also works with small TechTown businesses in Detroit's underserved neighborhoods. "It is rare that they are talking to one another about business advice. They may be talking about other things, but because of the perceived competiveness, they never talk about the business struggles. So we try to help them build that network."

Mistake No. 12: Don't listen to customers

Three words: Minimum viable product.

Those are the three words Tom Anderson of Automation Alley would like all tech startups to repeat like a mantra. Get the idea developed, get it out there, and see how the market reacts. Don't let perfect get in the way of innovation.

"In these companies, the founders are often a scientist who has a very clear idea of what the innovation is, and they keep pushing that idea and never test it in the marketplace," he said. "They don't necessarily listen to what the customer is telling them. Don't wait until your service is perfect; get in the market as soon as you can and then listen."

And keep listening. The other critical piece is continuing to adapt based on the feedback from the market. If the market prefers a blue widget to your beloved red, make it blue.

Jeremy Sanger, the founder of Ventech LLC, is a perfect example of an entrepreneur who adapted to the market. His Wixom-based company, which builds a device that provides near-instant heat, was originally geared toward the auto market.

"But it's hard for startups to sell into automotive, so he struggled," Anderson said.

Then Sanger transitioned into the school bus market, because his product could cut bus idling time and driver overtime by warming buses faster.

"That had good economics," Anderson said, "but school communities are slow making decisions and strapped for funds."

Sanger's third attempt was the winner: He provides his heating device to oil companies working in the arctic temperatures of Alaska.

"It's a mater of being responsive to where the opportunity is in the market," Anderson said. "But you have to do it in a focused or strategic way. You can't chase after every opportunity. Decide which one you can best address and then focus."

Mistake No. 13: Don't communicate clearly

Whether you're pitching to an investor, a bank or a potential client, you don't have much time to make a sale. So make every second count.

"I see a lot of entrepreneurs who don't get outside their own business," said Ross Sanders, executive director of Bizdom. "They use acronyms. They talk about how, not what. If it takes 15 of 20 minutes to explain your business, you get five minutes of advice and consideration."

Mistake No. 14: Hire poorly

"They need bodies to handle the product development or delivery of services so they end up hiring anyone who can breathe or fog a mirror," said Holland. "But you have to be careful because not having the right talent will kill a startup."

So how do you do that? You ask the right questions of yourself and the candidate both in finding the right talent and the right fit for the company.

Say you need someone with analytical capacity, for example. Is it statistical, logic, what is it that actually needs done? You have to know exactly what the position needs to do and how it fits in the overall structure of your operations.

For candidates, try questions such as:

What is the most difficult thing you have done in the past?

What projects have you worked on that were difficult?

How did you overcome them?

"If they have a good track record, they can explain all of this," Holland said.

But what if they have the right talent, how do you know if they are a good cultural fit?

Holland suggests these questions:

Have you ever been in a job and your boss asked you do something illegal? How did that make you feel? What did you do about it?

Did you ever have to terminate anyone in your work and how did you feel about that? Was it the right thing to do?

In your previous jobs, did you ever feel completely engaged where you woke up excited to go to work? Tell me about that job?

"That," Holland said, "will give you a good idea of their culture.

"Every dollar is so important that everyone has to be pulling in the same direction. Hire for culture and hire the right talent. Take your time to make sure you are being very specific and filtering through the candidates."

Cope from Comerica Bank said the same principles apply to forming partnerships. But it's harder to get rid of a partner than an employee, so be doubly cautious.

"Ask yourself if you really know each other," he said. "Do you have the same guiding principles? Because the only way to get out of a partnership is to sell it or close it."

Mistake No. 15: Say yes to everything

When you're a food entrepreneur, everyone wants your food. For a party, for an event, for a meeting, for everything. And they want you to donate it for free.

"People say, 'Oh, well, you'll get a lot of good exposure,' " said Daniel of FoodLab. "It's not always clear whether that exposure, spending money on that product, will yield the results that you are looking for."

To avoid giving away everything in the name of charity or exposure, think about who your target market is. Who do you want to be catering for? Who do you want coming in your restaurant? Then ask the event organizer who they anticipate will attend their event. See if it matches up with your target demographic.

Detroit Vegan Soul is an example of a company that was smart about how it handled requests, Daniel said.

"They did a ton of catering and got a ton of pickup and interest in the beginning," she explained. "But I noticed when I sent requests over the FoodLab listserv they always had good questions to ask. There were times when I saw them passing up opportunities because they knew it wasn't right for them."